Signalling a major change in its intention to go ahead with key reforms, the government has approved FDI in multi-brand retail and aviation and also gave its nod for disinvestment in four PSUs
Moneylife Digital Team
In a major decision, the Indian government on Friday approved foreign direct investment (FDI) in multi-brand retail, aviation sector and broadcast services while permitting divestment in four state-run companies including NALCO, MMTC, Hindustan Copper and Oil India.
The decisions are being interpreted as a major signal from the government of its intention to go ahead with key reforms negating an image of policy paralysis. The decision to allow 51% FDI in retail will be a game-changer for the estimated $590 billion (Rs29.50 lakh crore) retail market dominated by neighbourhood stores.
According to experts, this move would benefit large retailers like Pantaloon, Bharti Retail as well as consumer, who can expect prices to come down by 10-15% in large format stores. Retail giants will play a significant role in improving supply and distribution systems in the country with economies of scale, superior expertise and trained staff, feel the experts.
The Cabinet also allowed FDI in aviation by foreign carriers. It also raised the FDI cap on various streams of broadcast services by up to 74%.
Earlier in November last year, the Cabinet decided to remove the 51% cap on FDI in single brand format under which companies in food, lifestyle and sports business run stores. The big retailers were required to bring in minimum investment of $100 million, of which half should be in the back-end infrastructure like cold chains, processing and packaging. These players would have to source at least 30% of manufactured and processed products from small-scale units.
Anticipating the move to allow FDI, retail stocks, including Pantaloon Retail, Provogue India and Koutons Retail, rose 2-8%. Shares of Future Group company Pantaloon Retail jumped 6.9% to settle at Rs157.60, while Provogue India climbed 6.6% to Rs16.04 on the BSE. Among others, Brandhouse Retails soared 8%, Koutons Retail India gained 4.9%, Shoppers Stop (2.8%) and Tata Group retail unit Trent (2.3%) also notched up smart gains.
Currently, international retailers are already present in India through their cash and carry model (selling to other retailers and business establishments), where 100% FDI is allowed. Wal-Mart runs its cash and carry business in partnership with Bharti Retail, Tesco runs its cash and carry business in partnership with Trent, owned by the Tata Group.
According to a retail report authored by Boston Consulting Group (BCG) and CII, current size of organized retail in India stands at close to $28 billion or 6%-7% of total retail market. The total retail market is estimated to grow to $1,250 billion by 2020, of which 21% would be organized. With added capital investments from key overseas players, the sector would have the potential to significantly impact the Indian economy, the report said.
More details soon...